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Debates Forum

Debates Forum

  1. Subscriber divegeester
    Nice suit...
    25 Nov '10 22:47
    Can trading entities of different and greatly varying economic strength be successfully joined at the hip by a common currency and common economic policy? Does Ireland's economic carnage represents the end of a common currency for the EU?
  2. 25 Nov '10 23:27
    http://www.bbc.co.uk/news/business-11830532

    Much has been written about the theoretical attractions for financially troubled countries in exiting the euro-zone. But the question of how a country would go about it is less well explored. And the more closely you examine the question of "how" - as opposed to "why" - a country might leave the euro, the clearer it becomes that the practical difficulties are huge.

    To establish a new currency a country would have to convert all existing euro-denominated savings at a fixed rate on a given date. But savers and businesses would not wait passively for that date to arrive. The euro may be under pressure, but leaving it could make things worse The main reason for creating a new currency would be to increase the country's competitiveness by making its exports cheaper. So savers and investors would assume that the new currency would depreciate against the euro - probably very rapidly - and want to keep their savings in euros, or transfer them to another well-established currency such as the US dollar.

    The first practical problem, then, is that if it becomes clear that a country is seriously thinking of leaving the euro a huge amount of money will leave the country. This is sometimes referred to as "capital flight". The overall effect would be to trigger huge transfers of deposits out of the country and wreck the banking system. The government in question would almost certainly try to impose controls to prevent this kind of capital flight, but senior policy-makers are very sceptical about whether such controls would be effective in 21st century Europe.

    But if a prolonged national debate about leaving the euro creates a risk of capital flight, would the alternative be to prepare in secret and announce it suddenly? Such a plan might work in a totalitarian state, but does not allow for parliamentary debate, legislation and all the other processes of a modern democracy. And the idea that huge numbers of new bank notes could be prepared and distributed in secret - ready for the appointed currency conversion date - is absurd.

    Europe's troubled economies are finding it hard to borrow money from investors However, suppose for a moment that these practical problems could be overcome, where would the country leaving the euro stand financially? It would have a large national debt denominated in euros. Remaining committed to paying interest on that debt in euros while tax revenues are generated in the new currency would be a big risk.

    The alternative would be to announce that national borrowings have been converted into the new currency. For overseas bond investors, this would amount to a default. When the country wanted to borrow more it would almost certainly have to pay punitive interest rates to persuade bond market investors to participate.
  3. 26 Nov '10 07:25
    Originally posted by divegeester
    Can trading entities of different and greatly varying economic strength be successfully joined at the hip by a common currency and common economic policy? Does Ireland's economic carnage represents the end of a common currency for the EU?
    There are actually quite some large differences between US states, as well. Connecticut has almost double the GDP per capita of Mississippi.

    Also, eurozone member states don't have a common economic policy, just a common monetary policy. The euro is still fairly strong compared to the dollar, looking at its history since inception, so apparently investors are still fairly confident.
  4. Standard member uzless
    The So Fist
    26 Nov '10 08:22
    Originally posted by divegeester
    Can trading entities of different and greatly varying economic strength be successfully joined at the hip by a common currency and common economic policy? Does Ireland's economic carnage represents the end of a common currency for the EU?
    no, but if portugal, spain, italy need bailouts too...
  5. Subscriber kmax87
    You've got Kevin
    26 Nov '10 10:19
    Originally posted by uzless
    no, but if portugal, spain, italy need bailouts too...
    rising debt will only make the euro stronger.....well its worked for the us dollar hasn't it?
  6. Subscriber Wajoma
    Die Cheeseburger
    26 Nov '10 10:26
    Originally posted by kmax87
    rising debt will only make the euro stronger.....well its worked for the us dollar hasn't it?
    http://www.xe.com/
  7. Standard member Palynka
    Upward Spiral
    26 Nov '10 10:59
    Originally posted by divegeester
    Can trading entities of different and greatly varying economic strength be successfully joined at the hip by a common currency and common economic policy? Does Ireland's economic carnage represents the end of a common currency for the EU?
    The Euro has been the saving grace of the countries involved, which would almost certainly have had a currency crisis along with the debt crisis. They have no interest in moving away from it. As for Germany, its has gain massively from economic integration and now almost half of its total exports go to Euro countries. Germany has no interest in a Eurozone crisis because it needs Eurozone demand and it also has no interest in seeing a potential new German Mark appreciate with respect to the other EMU members (which given the current situation would definitely happen, although with respect to the rest of the world is not clear).

    So even abstracting from the banking linkages there is no economic advantage of breaking up the Euro for anyone now. In the long-run the case is less clear cut (although I believe the benefits outweigh the costs, it's still a very open debate as there is no precedent it) but for now I don't see neither the economic nor the political interest to do so.
  8. Subscriber no1marauder
    It's Nice to Be Nice
    27 Nov '10 01:34
    Originally posted by Palynka
    The Euro has been the saving grace of the countries involved, which would almost certainly have had a currency crisis along with the debt crisis. They have no interest in moving away from it. As for Germany, its has gain massively from economic integration and now almost half of its total exports go to Euro countries. Germany has no interest in a Eurozone cr ...[text shortened]... recedent it) but for now I don't see neither the economic nor the political interest to do so.
    If there was no Euro, they'd have a solution i.e. devaluation without the necessity to wreck their economies to appease foreign bankers.
  9. Subscriber kmax87
    You've got Kevin
    27 Nov '10 03:23
    Originally posted by Wajoma
    http://www.xe.com/
    Apart from showing the Pound as the strongest currency at the moment, which sort of adds weight to the assertions made in Empire of Cities, your point is?
  10. 27 Nov '10 09:06
    Originally posted by no1marauder
    If there was no Euro, they'd have a solution i.e. devaluation without the necessity to wreck their economies to appease foreign bankers.
    But the kind of devaluation caused by leaving the euro would cripple the economy even more as imports would become prohibitively expensive.
  11. Standard member Palynka
    Upward Spiral
    27 Nov '10 16:05 / 1 edit
    Originally posted by no1marauder
    If there was no Euro, they'd have a solution i.e. devaluation without the necessity to wreck their economies to appease foreign bankers.
    How would devaluing help them? If anything, they'd need more local currency to pay for debt in foreign denomination (which was the case before the Euro). Default would be virtually inevitable. In fact, being insulated from a currency crisis is what allows the governments to have different options.

    The alternative would be exiting the Euro, converting all debt to local currency and then let the currency fall. But this would be equivalent from a bond investors perspective to partial default.
  12. Standard member Palynka
    Upward Spiral
    27 Nov '10 16:07
    Originally posted by kmax87
    Apart from showing the Pound as the strongest currency at the moment, which sort of adds weight to the assertions made in Empire of Cities, your point is?
    How does that show that the pound is the strongest currency?
  13. 27 Nov '10 16:13
    Originally posted by kmax87
    Apart from showing the Pound as the strongest currency at the moment, which sort of adds weight to the assertions made in Empire of Cities, your point is?
    http://en.wikipedia.org/wiki/French_franc#New_franc
  14. Subscriber no1marauder
    It's Nice to Be Nice
    27 Nov '10 17:13
    Originally posted by Palynka
    How would devaluing help them? If anything, they'd need more local currency to pay for debt in foreign denomination (which was the case before the Euro). Default would be virtually inevitable. In fact, being insulated from a currency crisis is what allows the governments to have different options.

    The alternative would be exiting the Euro, converting all ...[text shortened]... rrency fall. But this would be equivalent from a bond investors perspective to partial default.
    Iceland devalued the krono but didn't default and their debt load was worse than Ireland's. True the government had to impose austerity measures also, but they did those that they felt were necessary not those ordered by the IMF and foreign banks.

    Your second paragraph seems like a reasonable plan actually; bond investors should have to take a hit as their investment has really went south.
  15. Subscriber no1marauder
    It's Nice to Be Nice
    27 Nov '10 17:16
    Originally posted by KazetNagorra
    But the kind of devaluation caused by leaving the euro would cripple the economy even more as imports would become prohibitively expensive.
    Somehow the many countries that have devalued their currencies over the last 100 years managed to survive the inevitable import price rises of devaluation ("prohibitively expensive" seems like an overstatement based on historical evidence).